Question 1

If bonds with different maturities are perfect substitutes,then the ________ on these bonds must be equal.

Accepted Answer

A) expected return 
B) surprise return 
C) surplus return 
D) excess return 
A) expected return 
B) surprise return 
C) surplus return 
D) excess return

Question 2

An increase in the riskiness of corporate bonds will ________ the price of corporate bonds and ________ the price of Treasury bonds,everything else held constant.

Accepted Answer

A) increase; increase 
B) reduce; reduce 
C) reduce; increase 
D) increase; reduce 
A) increase; increase 
B) reduce; reduce 
C) reduce; increase 
D) increase; reduce

Question 3

When yield curves are steeply upward sloping,

Accepted Answer

A) long-term interest rates are above short-term interest rates. 
B) short-term interest rates are above long-term interest rates. 
C) short-term interest rates are about the same as long-term interest rates. 
D) medium-term interest rates are above both short-term and long-term interest rates. 
A) long-term interest rates are above short-term interest rates. 
B) short-term interest rates are above long-term interest rates. 
C) short-term interest rates are about the same as long-term interest rates. 
D) medium-term interest rates are above both short-term and long-term interest rates.

Question 4

According to the expectations theory of the term structure,the interest rate on a long-term bond will equal the ________ of the short-term interest rates that people expect to occur over the life of the long-term bond.

Accepted Answer

A) average 
B) sum 
C) difference 
D) multiple 
A) average 
B) sum 
C) difference 
D) multiple

Question 5

According to the expectations theory of the term structure

Accepted Answer

A) when the yield curve is steeply upward sloping,short-term interest rates are expected to remain relatively stable in the future. 
B) when the yield curve is downward sloping,short-term interest rates are expected to remain relatively stable in the future. 
C) investors have strong preferences for short-term relative to long-term bonds,explaining why yield curves typically slope upward. 
D) yield curves should be equally likely to slope downward as slope upward. 
A) when the yield curve is steeply upward sloping,short-term interest rates are expected to remain relatively stable in the future. 
B) when the yield curve is downward sloping,short-term interest rates are expected to remain relatively stable in the future. 
C) investors have strong preferences for short-term relative to long-term bonds,explaining why yield curves typically slope upward. 
D) yield curves should be equally likely to slope downward as slope upward.

Question 6

Everything else held constant,if the federal government were to guarantee today that it will pay creditors if a corporation goes bankrupt in the future,the interest rate on corporate bonds will ________ and the interest rate on Treasury securities will ________.

Accepted Answer

A) increase; increase 
B) increase; decrease 
C) decrease; increase 
D) decrease; decrease 
A) increase; increase 
B) increase; decrease 
C) decrease; increase 
D) decrease; decrease

Question 7

Which of the following bonds are considered to be default-risk free?

Accepted Answer

A) Municipal bonds 
B) Investment-grade bonds 
C) U.S.Treasury bonds 
D) Junk bonds 
A) Municipal bonds 
B) Investment-grade bonds 
C) U.S.Treasury bonds 
D) Junk bonds

Question 8

If the probability of a bond default increases because corporations begin to suffer large losses,then the default risk on corporate bonds will ________ and the expected return on these bonds will ________,everything else held constant.

Accepted Answer

A) decrease; increase 
B) decrease; decrease 
C) increase; increase 
D) increase; decrease 
A) decrease; increase 
B) decrease; decrease 
C) increase; increase 
D) increase; decrease

Question 9

A particularly attractive feature of the ________ is that it tells you what the market is predicting about future short-term interest rates by just looking at the slope of the yield curve.

Accepted Answer

A) segmented markets theory 
B) expectations theory 
C) liquidity premium theory 
D) separable markets theory 
A) segmented markets theory 
B) expectations theory 
C) liquidity premium theory 
D) separable markets theory

Question 10

The spread between interest rates on low quality corporate bonds and U.S.government bonds

Accepted Answer

A) widened significantly during the Great Depression. 
B) narrowed significantly during the Great Depression. 
C) narrowed moderately during the Great Depression. 
D) did not change during the Great Depression. 
A) widened significantly during the Great Depression. 
B) narrowed significantly during the Great Depression. 
C) narrowed moderately during the Great Depression. 
D) did not change during the Great Depression.

Question 11

If the yield curve slope is flat for short maturities and then slopes steeply upward for longer maturities,the liquidity premium theory (assuming a mild preference for shorter-term bonds)indicates that the market is predicting

Accepted Answer

A) a rise in short-term interest rates in the near future and a decline further out in the future. 
B) constant short-term interest rates in the near future and further out in the future. 
C) a decline in short-term interest rates in the near future and a rise further out in the future. 
D) constant short-term interest rates in the near future and a decline further out in the future. 
A) a rise in short-term interest rates in the near future and a decline further out in the future. 
B) constant short-term interest rates in the near future and further out in the future. 
C) a decline in short-term interest rates in the near future and a rise further out in the future. 
D) constant short-term interest rates in the near future and a decline further out in the future.

Question 12

Municipal bonds have default risk,yet their interest rates are lower than the rates on default-free Treasury bonds.This suggests that

Accepted Answer

A) the benefit from the tax-exempt status of municipal bonds is less than their default risk. 
B) the benefit from the tax-exempt status of municipal bonds equals their default risk. 
C) the benefit from the tax-exempt status of municipal bonds exceeds their default risk. 
D) Treasury bonds are not default-free. 
A) the benefit from the tax-exempt status of municipal bonds is less than their default risk. 
B) the benefit from the tax-exempt status of municipal bonds equals their default risk. 
C) the benefit from the tax-exempt status of municipal bonds exceeds their default risk. 
D) Treasury bonds are not default-free.

Question 13

According to the liquidity premium theory of the term structure,a flat yield curve indicates that short-term interest rates are expected to

Accepted Answer

A) rise in the future. 
B) remain unchanged in the future. 
C) decline moderately in the future. 
D) decline sharply in the future. 
A) rise in the future. 
B) remain unchanged in the future. 
C) decline moderately in the future. 
D) decline sharply in the future.

Question 14

Typically,yield curves are

Accepted Answer

A) gently upward sloping. 
B) mound shaped. 
C) flat. 
D) bowl shaped. 
A) gently upward sloping. 
B) mound shaped. 
C) flat. 
D) bowl shaped.

Question 15

According to the liquidity premium theory of the term structure

Accepted Answer

A) because buyers of bonds may prefer bonds of one maturity over another,interest rates on bonds of different maturities do not move together over time. 
B) the interest rate on long-term bonds will equal an average of short-term interest rates that people expect to occur over the life of the long-term bonds plus a term premium. 
C) because of the positive term premium,the yield curve will not be observed to be downward sloping. 
D) the interest rate for each maturity bond is determined by supply and demand for that maturity bond. 
A) because buyers of bonds may prefer bonds of one maturity over another,interest rates on bonds of different maturities do not move together over time. 
B) the interest rate on long-term bonds will equal an average of short-term interest rates that people expect to occur over the life of the long-term bonds plus a term premium. 
C) because of the positive term premium,the yield curve will not be observed to be downward sloping. 
D) the interest rate for each maturity bond is determined by supply and demand for that maturity bond.

Question 16

The risk premium on corporate bonds reflects the fact that corporate bonds have a higher default risk and are ________ U.S.Treasury bonds.

Accepted Answer

A) less liquid than 
B) less speculative than 
C) tax-exempt unlike 
D) lower-yielding than 
A) less liquid than 
B) less speculative than 
C) tax-exempt unlike 
D) lower-yielding than

Question 17

A decrease in the liquidity of corporate bonds,other things being equal,shifts the demand curve for corporate bonds to the ________ and the demand curve for Treasury bonds shifts to the ________.

Accepted Answer

A) right; right 
B) right; left 
C) left; left 
D) left; right 
A) right; right 
B) right; left 
C) left; left 
D) left; right

Question 18

When the Treasury bond market becomes more liquid,other things equal,the demand curve for corporate bonds shifts to the ________ and the demand curve for Treasury bonds shifts to the ________.

Accepted Answer

A) right; right 
B) right; left 
C) left; right 
D) left; left 
A) right; right 
B) right; left 
C) left; right 
D) left; left

Question 19

Over the next three years,the expected path of 1-year interest rates is 4,1,and 1 percent.The expectations theory of the term structure predicts that the current interest rate on 3-year bond is

Accepted Answer

A) 1 percent. 
B) 2 percent. 
C) 3 percent. 
D) 4 percent. 
A) 1 percent. 
B) 2 percent. 
C) 3 percent. 
D) 4 percent.

Question 20

If a corporation begins to suffer large losses,then the default risk on the corporate bond will

Accepted Answer

A) increase and the bond's return will become more uncertain,meaning the expected return on the corporate bond will fall. 
B) increase and the bond's return will become less uncertain,meaning the expected return on the corporate bond will fall. 
C) decrease and the bond's return will become less uncertain,meaning the expected return on the corporate bond will fall. 
D) decrease and the bond's return will become less uncertain,meaning the expected return on the corporate bond will rise. 
A) increase and the bond's return will become more uncertain,meaning the expected return on the corporate bond will fall. 
B) increase and the bond's return will become less uncertain,meaning the expected return on the corporate bond will fall. 
C) decrease and the bond's return will become less uncertain,meaning the expected return on the corporate bond will fall. 
D) decrease and the bond's return will become less uncertain,meaning the expected return on the corporate bond will rise.

Exam 6: The Risk and Term Structure of Interest Rates

If bonds with different maturities are perfect substitutes,then the ________ on these bonds must be equal.

An increase in the riskiness of corporate bonds will ________ the price of corporate bonds and ________ the price of Treasury bonds,everything else held constant.

When yield curves are steeply upward sloping,

According to the expectations theory of the term structure,the interest rate on a long-term bond will equal the ________ of the short-term interest rates that people expect to occur over the life of the long-term bond.

According to the expectations theory of the term structure

Everything else held constant,if the federal government were to guarantee today that it will pay creditors if a corporation goes bankrupt in the future,the interest rate on corporate bonds will ________ and the interest rate on Treasury securities will ________.

Which of the following bonds are considered to be default-risk free?

If the probability of a bond default increases because corporations begin to suffer large losses,then the default risk on corporate bonds will ________ and the expected return on these bonds will ________,everything else held constant.

A particularly attractive feature of the ________ is that it tells you what the market is predicting about future short-term interest rates by just looking at the slope of the yield curve.

The spread between interest rates on low quality corporate bonds and U.S.government bonds

If the yield curve slope is flat for short maturities and then slopes steeply upward for longer maturities,the liquidity premium theory (assuming a mild preference for shorter-term bonds)indicates that the market is predicting

Municipal bonds have default risk,yet their interest rates are lower than the rates on default-free Treasury bonds.This suggests that

According to the liquidity premium theory of the term structure,a flat yield curve indicates that short-term interest rates are expected to

Typically,yield curves are

According to the liquidity premium theory of the term structure

The risk premium on corporate bonds reflects the fact that corporate bonds have a higher default risk and are ________ U.S.Treasury bonds.

A decrease in the liquidity of corporate bonds,other things being equal,shifts the demand curve for corporate bonds to the ________ and the demand curve for Treasury bonds shifts to the ________.

When the Treasury bond market becomes more liquid,other things equal,the demand curve for corporate bonds shifts to the ________ and the demand curve for Treasury bonds shifts to the ________.

Over the next three years,the expected path of 1-year interest rates is 4,1,and 1 percent.The expectations theory of the term structure predicts that the current interest rate on 3-year bond is

If a corporation begins to suffer large losses,then the default risk on the corporate bond will

Why Study Money, banking, and Financial Markets

An Overview of the Financial System

What Is Money

Understanding Interest Rates

The Behavior of Interest Rates

The Stock Market, the Theory of Rational Expectations, and the Efficient Market Hypothesis

An Economic Analysis of Financial Structure

Financial Crises

Banking and the Management of Financial Institutions

Economic Analysis of Financial Regulation

Banking Industry: Structure and Competition

Central Banks and the Federal Reserve System

The Money Supply Process

Tools of Monetary Policy

The Conduct of Monetary Policy: Strategy and Tactics

The Foreign Exchange Market

The International Financial System

Quantity Theory,inflation and the Demand for Money

The Is Curve

The Monetary Policy and Aggregate Demand Curves

Aggregate Demand and Supply Analysis

Monetary Policy Theory

The Role of Expectations in Monetary Policy

Transmission Mechanisms of Monetary Policy

The ISLM Model

Filters

An increase in the riskiness of corporate bonds will the price of corporate bonds and the price of Treasury bonds,everything else held constant.

Everything else held constant,if the federal government were to guarantee today that it will pay creditors if a corporation goes bankrupt in the future,the interest rate on corporate bonds will and the interest rate on Treasury securities will .

If the probability of a bond default increases because corporations begin to suffer large losses,then the default risk on corporate bonds will and the expected return on these bonds will ,everything else held constant.

A decrease in the liquidity of corporate bonds,other things being equal,shifts the demand curve for corporate bonds to the and the demand curve for Treasury bonds shifts to the .

When the Treasury bond market becomes more liquid,other things equal,the demand curve for corporate bonds shifts to the and the demand curve for Treasury bonds shifts to the .